1	VenturePoint 2001 Company Valuations in Investment and Divestment Decisions Jelle Sjoerdsma Managing Director Dynamic Equity Limited 23 January 2001
2	All Valuations are Subjective Three theoretical approaches to company valuation: Asset valuation - looking back Market valuation - looking around Income valuation - looking forward
3	Asset Valuation Company value = Assets - Liabilities Balance sheet reflects history, not the future Need adjustments to assess current situation bad debts in A/R dead stock and current prices in inventories current market or replacement cost of fixed assets intangible assets: brands and IPR leases and contingent claims pension obligations Many accounting rules are discretionary Adjustments are discretionary
4	Market Valuation Company value = market price for comparable companies Most common is P/E valuation adjust for industry / type of business ? adjust for lack of liquidity in non-public companies ? adjust for shareholder influence ? Problems Trinidad is very small market, with very few transactions Markets can display irrationality and herd mentality Very few comparable companies Required information often is not public How to value companies without earnings ?
5	Income Valuation Company Value = Net Present Value of future income streams Theoretically the best approach Major problems: Which discount rate to calculate NPV ? discount rate should reflect risk ! how do you assess risk of private companies or new ventures ? Who has a crystal ball to predict the future ?
6	All Valuations are Subjective Each approach will give a different answer Each answer is theoretically “correct” Every valuation approach in practice requires subjective judgements, adjustments or even predictions Valuation efforts can only give a range of possible values for a company
7	VC Valuations are Negotiated VC investments are based on plans and expectations for future growth Need to asses company value now? in the future? Growth path for typical company
8	VC Stimulates Growth Select companies with unrealised growth potential Extra capital unlocks potential VC firm should add value too
9	VC Valuation Points Pre-Entry Value is current value without VC investment Post-Entry Value is current value after VC investment Exit Value is future value at time of VC exit
10	Post-Entry Value Sets Price VC shareholding % = VC Investment / Post-Entry Value Discounted NPV of Exit Value sets cap Pre-Entry Value sets floor
11	VC Valuations are Negotiated Review Pre-Entry Value Determine how much VC investment is needed Estimate timing of exit Estimate future value at exit Estimate risk Select discount rate Calculate likely NPV of Exit Value Review dividends and other shareholder income Agree Post-Entry Value
12	Advice to Entrepreneurs Provide information to allow all valuation approaches audited financial statements current management accounts future financial projections (P&L, B/S, Cash Flow) Do your homework first Be prepared to negotiate Keep expectations realistic Allow your company to get sufficient capital Go for Growth !